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From daunting to digital: How technology makes debt collections better – Academia

Rishabh Goel

Uttar Pradesh, India   ●  
Fri, November 25, 2022


Let’s face it, debt collection is daunting for everyone involved. Despite assumptions that lenders’ and borrowers’ interests are at odds, they both want the same thing: Debt resolution that is timely and seamless.

However, today’s debt collection methods of manually contacting borrowers via repeated phone calls, letters, and visitations are archaic in the modern and high- technology era, especially in the financial services industry.

According to Google, Temasek, and Bain & Company, Indonesia is the largest digital economy  in Southeast Asia with US$70 billion in gross merchandise value (GMV) last year. The same report also predicted that the country’s digital economy will grow to $146 billion in 2025, an environment fit for potential markets and services to grow.

Fueled by a young, rapidly digitized population with increased purchasing power, the archipelago is a breeding ground for technological advancement. Financial technology (fintech) and digital banking have grown exponentially in the past two years. A case in point, digital banking accounts reached 47 million in 2021 alone and are projected to reach 74 million in 2026 by a recent study.

However, easy, and ubiquitous access to credit and buy-now-pay-later (BNPL) also led to higher default rates as the economic uncertainties continued. Debt collections could become a bigger issue for Indonesia, as The Financial Services Authority (OJK) reported that the banking gross non-performing loan (NPL) number rose to 2.9 percent in July from 2.8 in June this year. The recent rising gas prices will likely drive NPL and default rate numbers even higher in the future as debtors prioritize their expenses.

Financial institutions were already facing difficulties with debt collections. In research by Euler Hermes titled “2018 Collection Complexity Score and Rating,” Indonesia ranked seventh among nations where it is “severely difficult” to collect unpaid debts. One of the reasons why it is difficult to obtain debt repayment in Indonesia is that collections have traditionally been a manual and labor-intensive activity.

The traditional approach is often marred with hostile recovery agents and repeated calls. While Indonesia has yet to have a specific law on debt collections, financial service providers must adhere to guidelines from Bank Indonesia, OJK, and the Criminal Code (KUHP) that prohibit using physical and verbal intimidation. Still, news of debtors facing violence, intimidation is rampant in the media. The situation creates an unpleasant experience and a negative stigma around debt collections.

The Indonesian Fintech Lenders Association (AFPI) has also encouraged firms to certify their debt collection team members to keep up with industry standards. While educating debt collectors is important, implementing the right technology within financial services’ debt collection solutions is equally significant.

Digital debt collections improve the speed and collection rates at a fraction of the price as well as minimize delinquencies. Lenders can leverage technology for optimizing the end-to-end loan recovery workflow, including communications, litigations, billings, payments, and field collections.

For example, artificial intelligence (AI) driven, and omnichannel debt collection solutions will lead to a more pleasant customer experience. A machine learning model-based engagement strategy can help lenders determine effective channels and resource allocation.

By segmenting customers, using a tailored communications plan for each segment, and personalizing the messaging for collections, lenders can not only enhance recoveries but also drastically cut down the cost of collections. Instead of following a one-fits-all strategy, lenders need to adopt dynamic and personalized strategies that are aligned to the risk assessment, borrower behavior, communications model, and analytical insights.

For field collections, mobile-based technology solutions have enabled the complete digitization of processes with innovative capabilities such as real-time field force geo-tracking, smart route planning, map-based navigation, digital receipts, in-app calling, and dashboards. The entire legal workflow including notices, legal communications, case follow-ups, and status tracking can be easily automated and digitized for higher efficiencies.

According to the We Are Social report, Indonesia is home to 204.7 million internet users and 100 million smartphone owners, signaling that most Indonesians can utilize technology to their advantage. Even in small cities and villages, customers are now reachable through an omnichannel outreach including SMS, WhatsApp, Interactive Voice Response (IVR), Voicebots, Chatbots, Email, or voice messages.

Borrowers prefer to be engaged on a channel and time that fits their schedule instead of being constantly reminded through generic communications. There is also a lesser probability of defaulting if customers are reminded and assisted timely regarding their upcoming payments.

As debt collections get more cost-efficient and faster, lenders with better recoveries will have a bigger chance to expand their portfolio by lending to newer segments in more remote areas, which have practically been outside the credit umbrella. This is where a comprehensive technology-based approach to collections can also contribute towards financial inclusion, especially noting that 92 million Indonesians are unbanked and 47 million are still underserved as stated in a 2019 Google report.

Providing credit to these individuals will not only open economic opportunities for underbanked people but also lessen the financial disparity in the long run.

Banks and other lending institutions need to adopt a more data-driven, digitized, and customer- oriented collections strategy that puts forward excellent service. Aside from boosting debt recovery for the business, opening new opportunities, and shifting the perspective of a once daunting practice, digital-based debt collection will create stronger customer loyalty, which leads to an overall better financing experience.


The writer is cofounder and CEO of Credgenics.

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